What is natural gas?
Natural gas is usually mistaken to be a by-product of crude oil together with gasoline and heating oil, but it actually isn’t. Natural gas exists alongside oil reserves, but it is not processed from crude oil like gasoline or heating oil.
Natural gas is one of the cleanest energy supplies due to its low carbon dioxide emissions when burnt. The drilling technology used for the production of natural gas has advanced notably in recent years making it a key commodity to cover energy needs in the future.
Since natural gas is found near oil reserves, it also needs to be extracted from the ground. After the extraction process, natural gas is processed into gas and liquid forms in order to make it suitable for transport across countries. To ensure that the extracted natural gas meets the required quality specifications before distribution, it is transported to specialist plants to be examined, treated and stabilized. These extraction and treatment processes are costly and any trouble in the operation of these processes can greatly impact the price.
The uses or purposes of natural gas include heating, electricity generation and cooking using gas stoves. Though the electricity market is the major gas consumer, most of its applications are household-related.
What affects gas prices?
As with any energy commodity, demand and supply are key in determining its price. Here are the factors that impact the supply and demand for natural gas:
1. Extraction and treatment
The extraction and treatment of natural gas are expensive processes. Natural gas occurs alongside oil reserves deep underground, so its extraction process involves a great amount of machine power and energy. Any disruption in the extraction process will impede or delay the production of natural gas and therefore result in decreased gas supply and increased price. The treatment process is an even more expensive operation and any setback in this process will greatly impact the gas supply and its price.
2. Seasonal patterns and weather
Demand for natural gas is also seasonal and weather-related. During cold weather or in the winter season, the demand for natural gas for heating purposes increases and therefore causes increase in prices. During hot weather or in the summer season, natural gas can experience a decrease in demand for heating purposes, but this comes with an increase in demand for electricity generation because of the increased use of air conditioners and coolers.
3. Accidents and disasters
Disastrous events that affect the extraction, treatment, distribution and consumption of natural gas will directly affect the levels of gas supply and demand. Operational disruptions will directly cause delays and reductions in gas supply, thus causing price hikes during the recovery period.
The leading gas consuming nation is the U.S., followed by Russia, China and Iran. These nations import and use the greatest amount of natural gas for heating and power generation. Their demand rates drive the gas pricing, so any sudden change in demand from any of these countries will cause the gas price to fluctuate significantly.